MAS-09: QUANTITATIVE TECHNIQUES

QUANTITATIVE TECHNIQUES refer to the application of mathematics in actual business operations. It is

also known as quantitative methods.

OPERATIONS RESEARCH refers to the discipline of applying quantitative methods in organizational

planning and control,

TYPICAL QUANTITATIVE METHODS APPLICATIONS

● Corporate planning models
● Forecasting mechanism
● Productivity and efficiency measure
● Inventory planning and control
● Resource allocation

NETWORK MODELS

NETWORK MODELS involve project scheduling techniques that are designed to aid the planning and
control of large-scale projects that have many interrelated activities. These models aid management in
predicting and controlling costs that pertain to certain projects or business activities.

COMMON PROJECT SCHEDULING TECHNIQUES

1. Gantt or bar chart
2. Program Evaluation and Review Technique (PERT)
3. Critical Path Method (CPM)

SAMPLE APPLICATIONS: building constructions, book publishing, new product planning, feasibility
studies, research and development projects, and audit planning and scheduling

GANTT CHARTS
This is a graphical illustration of a scheduling technique in the form of a horizontal bar chart. The
project is divided into different sub-projects called activities or tasks (also called 'milestones). The starting
and completion time of activity is estimated and a bar chart is prepared showing each activity as a
horizontal bar along a time scale.

Tasks

May June July August

Queries: 1. Which task takes the longest time to finish?

2. All tasks are simultaneously performed in which month?

PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT) - CRITICAL PATH METHOD (CPM)
PERT IS developed to aid managers in controlling large-Scale, complex problems.
PERT-RELATED TERMINOLOGIES
● PERT diagram is a probabilistic diagram of the interrelationship of a complex series of
activities; it is a free-form network showing each activity as line between events.
● EVENTS discrete moment in time representing the start or finish of an activity; they consume
no resources.
● ACTIVITIES - tasks to be accomplished; they consume resources (including time).
⮚ Series an activity that cannot be done unless another activity is undertaken first.
⮚ Parallel- an activity that can be performed simultaneously with another activity.
CPM, like PERT, is a network technique; however, CPM uses deterministic time and cost estimates,
among is advantages include cost estimates plus the concept of crash efforts and costs.
 CPM-RELATED TERMINOLOGIES
● CRITICAL PATH Is longest path through the PERT network.
● EXPECTED TIME (t) is the average time an activity would require if it were repeated times.

te = ( t o + 4 t m + t p ) ÷ 6

Where: to optimistic time; tm-most likely time; tp - pessimistic time

● SLACK TIME the amount of time that can be added to an activity without increasing the delay
required on the critical path; the length of time an activity can be delayed without forcing a
delay for the entire project.
● CRASH TIME - the amount of time to complete an activity assuming that, under rush or urgent
condition, all available resources were devoted to the task (e.g., overtime, extra labor, etc);
any crash time spent in an activity normally would incur crash cost.

EXERCISES: PERT-CPM
1. Dayagsky Construction Firm, Inc. will soon begin to work on a building for US Tea that was initially
started by another firm that has gone out of business. The construction firm's schedule of activities
and related expected completion time for Us Tea project are presented in the following time table
Activity Code Activity Description Estimated Time (in weeks)
A–B Obtain on-site work permits 2
B–E Repair damages done by vandals 8
B–C Inspect construction materials left on site 1
C–E Order and receive construction materials 2
C–D Apply for waiver to add new materials 3
D–E Obtain waiver to add new materials 2
E–F Perform electric work 6
F–G Complete interior partitions 4

REQUIRED:
A) Prepare the PERT network for the US Tea project.
B) What is the critical path and its expected time in weeks?

1
C) What is the shortest path and its slack time in weeks?

25 2-6
2. A company is faced with the following PERT network situation for a certain project (time in days):

A
8 FINISH

S
4
1- 7 O
I N G

REQUIRED:
A) Determine the expected time (t.) for each activity.
B) Identify the critical path(s).
C) What is the shortest time to complete the entire project?

PROBABILITY ANALYSIS

PROBABILITY ANALYSIS is important to decision-making because of the unpredictability of future events.

Decision-making involves.
● RISK - this occurs when the probability distribution of the possible future state of nature is known.
● UNCERTAINTY this occurs when the probability distribution of possible future state of nature is not
known and must be subjectively determined.
The probability of an event varies from 0 to 1 (0%% to 100%). 100% or probability of 1.0 means that
event is certain to occur while zero probability means the event cannot occur under any circumstances.

THE CONCEPT OF EXPECTED VALUE

The expected value of an action is found by multiplying the probability of each outcome by its pay-
off and Summing up the products. A decision tree diagram is normally devised to show several
possible decisions or acts and the possible consequences (outcome or events) of each act.
PROBABILITY – RELATED TERMINOLOGIES
● Objective probabilities - calculated from either logic or actual experience.
● Subjective probabilities - estimates, based on judgment, of the likelihood of future events.
● Two events are said to be mutually exclusive if they cannot occur simultaneously.
● Two events are said to be independent if occurrence of one has no effect on probability of another
● The joint probability of two events is the probability that both will occur.
● The conditional probability of two events is the probability that one will occur given that the other
has already occurred.
EXERCISES: PROBABILIY ANALYSIS
1. Mojito Club sells cold sodas at Far Western University's home basketball games. In the year 2017, the
frequency of distribution of the demand for cups of sodas per day is presented below:
Sales Volume Frequency
2,000 cups 48 days (15%)
4,000 cups 80 days (25%)
6,000 cups 144 days (45%)
8,000 cups 32 days (10%)
10,000 cups 16 days (5%)
320 days
REQUIRED:
Determine the projected daily demand for sodas in 2018 using:
A) Deterministic approach (based on most likely event)
B) Expected value approach

2 Ube-AM Rita-PM Company plans to introduce a new product that requires an initial cash investment of P
440 If the product becomes successful, the net cash inflow is forecasted at P 800. However, if the
product becomes a failure, net cash inflow is estimated at P 200.

REQUIRED:
A) If the probability of success is 70%, what is the value of act "to invest?
B) What probability-percentages should be assigned to the events 'success' and 'failure" to be
indifferent between the two actions "to invest" and not to invest?

LEARNING CURVE
LEARNING CURVE describes the efficiencies arising from experience, because with experience comes
increased productivity. This productivity increases with production size, but at a decreasing rate as
diagrammed below:
The time required to perform a given task becomes progressively
shorter, but this is applicable only to the early stages of production.

Units The curve is expressed as a percentage of reduced time (usually

Produced between 60% and 80 %) to complete a task of each doubling of
Per day cumulative production. Hence, the time required is reduced by 20%
% to 40% each time cumulative production is doubled.

Cumulative Production

IMPORTANT NOTES IN LEARNING CURVE ANALYSIS

●The cumulative average time per unit is reduced by a certain percentage each time production doubles.
●Incremental unit time (time to produce the last unit) is reduced when production doubles.

EXERCISES: LEARNING CURVE

1. A particular manufacturing job is subject to an estimated 80% experience (learning) curve. The first unit
required 20 labor hours to complete.

REQUIRED:
A) What is the cumulative average time per unit after four (4) units are completed?
B) How many hours are required to produce a total of two (2) units?
C) How many hours are required to produce the second unit?
2. Which of the following unfavorable variances would be directly affected by the relative position of a
production process on the learning curve?
a. Material price c. Labor rate
b. Material usage d. Labor efficiency
 INVENTORY MODELS
INVENTORY MODELS are usually devised to minimize the costs associated with inventory while
maintaining certain level of inventories needed to sustain smooth operations.

COMPONENTS OF INVENTORY COSTS

The total inventory costs are comprised of:
❖ CARRYING COSTS: This cost increases with order size or quantity of inventory on hand. pie
Storage costs, insurance on inventory, normal spoilage, record keeping, security.
❖ ORDERNG COSTS: This cost decreases with order size or quantity of inventory on hand.
Example: Delivery costs, inspection, handling, purchasing9, receiving, quantity discount lost
ECONOMIC ORDER QUANTITY (EOQ)
EOQ refers to the number of units that should be placed every order to economize on the sum of
ordering costs and carrying costs.

22DDoo Where: o → Costs of placing one order

EOQ= cc D → Annual demand or usage in units
c → Cost of carrying one unit for one year

At EOQ, a firm incurs the lowest total inventory costs computed as follows

Total Costs MIN = EOQ (c) + D (o)

2 EOQ

CARRYING ORDERING
COSTS COSTS
Average inventory is computed as follows:
● No safety stock: EOQ ÷ 2
● With safety stock: (EOQ ÷ 2) + safety stock
● If EOQ is not available: (Beginning Inventory + Ending inventory) ÷ 2

ASSUMPTIONS & LIMITATIONS OF EOQ ANALYSIS

1. Annual determinable demand for inventory is spread evenly throughout the year.
2. Lead time does not vary and each order is delivered in a single delivery.
3. The unit cost of the units ordered is constant; thus, there can be no quantity discounts.

THE CONCEPT OF REORDER POINT

ORDER (Reorder) POINT IS the inventory lever (in units) that automatically calls for placing a new order.

When is the perfect time to place an order?

“When to reorder" is a stock-out problem, the objective is to order at a point in time so as not to run
out of stock before receiving the inventory ordered but not so early that an unnecessary quantity of
safety stock is maintained. When order point is computed, there may be stock-out situation if:
⮚ Demand is greater than expected during the lead time, or
⮚ The order time exceeds the anticipated lead time.

● LEAD TIME IS period from the time an order 1S placed until such time the order is received.
⮚ NORMAL (AVERAGE) LEAD TIME - this refers to the usual delay in the receipt of ordered goods.
⮚ MAXIMUM LEAD TIME - this adds to normal lead time a reasonable allowance for further delay.
● NORMAL LEAD TIME USAGE = normal lead time x average usage
● SAFETY STOCK = (maximum lead time - normal lead time) x average usage
● RE-ORDER POINT (without safety stock) = Normal lead time usage
● RE-ORDER POINT (with safety stock) = Normal lead time usage + safety stock
= maximum lead time x average Usage

EOQ APPLICATION: ECONOMIC LOT SIZE

When applied to production operations, the EOQ formula is used to compute the Economic Lot Size
(ELS)
Where: o → Set-up cost per batch of production
ELS = 2Do D → Annual production requirement
c c → Cost of carrying one unit for one year
 EXERCTSES INVENTORY MODELS
1. Shirley Company requires 40,000 shells for its signature product, "Pearly Shirl”. The shells will be used
evenly throughout the year The cost to place one order is P 20 while the cost to carry the she is in
inventory for one year is P 0 40.

REQUIRED:
A) What is the optimal order quantity (EOQ)
B) How many orders should be placed within the year
C) What is the average inventory in units?

2. Based on an analysis, the optimal order quantity is 4,000 units. Annual inventory carrying costs equal
30% of the average inventory level. The company pays P 10 per unit to buy the product and P 400 to
place an order The monthly demand for the product is 5,000 units.

REQUIRED: Determine the following

A) Annual inventory carrying c0sts.
B) Annual inventory ordering costs.
C) Total inventory costs.

3. Asher subsidiary Purchases 7,500 units of laundry soap per annum. The company works 300 days per
year. The average or normal purchase lead time is 7 working days while maximum lead-time is IO
working days.

REQUIRED:
A) How many units should Asher maintain as safety (buffer) stock
B) What is Asher's reorder point for the laundry soaps?

4. Each stock-Out of a product sold by Fermina Company costs P 2,000 per occurrence. The carrying cost
per unit of inventory is P 5 per year and the company orders 1,500 units of product 18 times a year at a
cost of P 200 per order. The probability of a stock-out at various levels of safety stock is:
Units of Safety Stock Probability of a Stock-Out
0 50%
200 30%
400 14%
600 5%
800 1%
What is the optimal level of safety stock for the company?
a. 200 units c. 600 units
b. 400 units d. 800 units

SOLUTION GUIDE

Safety Stock Carrying Cost + Stock-Out Cost = Total Costs

0
200 units
400 units
600 units
800 units

Carrying Cost: P 5.00 per unit (given)

Maximum Stock-Out Cost. P 2,000 x 18 orders = P 36,000

5. Marka Bookstore publishes a book about accounting Set-up cost is P 10. Marka prints 675 copies of the
book evenly throughout the year. The optimal production run (economic lot size) is 30.

REQUIRED:
How much is the unit carrying cost per year?

SOLUTION GUIDE

ELS = 30 = (2 x 675 x 10) ÷ c

 LINEAR PROGRAMMING
LINEAR PROGRAMMING is a mathematical technique that helps managers to determine the volume of
various products to produce when resources are limited or scarce in order to maximize net income. Is a
technique Used to optimize an objective function (maximize revenue of profit function, or minimize a cost
function), subject to constrains (such as scarce resources, minimum/maximum levels of production,
performance, etc.)

Maximize revenue
OBJECTIVE Maximize net profit
Minimize costs and expenses

Limited resources must be allocated to the company's most profitable products so that net income is
maximized. Linear programming models are extremely helpful in the analysis and solution of resource
allocation problems.

Simplex method is a much detailed linear programming technique especially useful if there are more than
two variables in a linear programming problem

EXERCISES: LINEAR PROGRAMMING

Maxi Company has following available materials X and Y to produce the its products A and B:
Product A Product B
Unit Contribution Margin P3 P4 Available
Required Materials Material X → 2 pieces 5 pieces 120 pieces
Material Y → 4 meters 2 meters 80 meters

REQUIRED: Determine the following:

A) Objective function involving maximization of the company's contribution margin.
B) Constraint function for Material X
C) Constraint function for Material Y
D) Optimal product mix

2. Neo Corporation produces a product in 50-gallon batches. The basic ingredients used for material B are
costing P 20 per gallon and for Material A, costing P 10 per gallon. No more than 1 gallon of A can be
used, and at least 15 gallons of B must be used.

REQUIRED:
How would the objective function (minimization of product cost) be expressed?

WRAP-UP EXERCISES (TRUE OR FALSE: MULTIPLE-CHOICE

1. Quantitative techniques help management in decision-making by way of employing various

mathematical applications in actual business situations.
2. The critical path through a network is the path that has the highest slack time.
3. Which of the following is heavily weighted in calculating PERT'S expected time?
a. Idealistic time
b. Most likely time
c. Optimistic time
d. Pessimistic time
4. A quantitative technique useful in projecting a firm's sales and profits is the learning curve.
5. An 80% learning curve means that:
a. The incremental time for each unit is 80% of the time of the unit before it
b. The cumulative average time is 800 of the cumulative average time at the previous unit
c. As production doubles, the incremental time for a unit is B0% of the time at the previous
doubling point
d. As production doubles, the cumulative average time is B0o of the time at the previous doubling
point
6. The purpose of economic order quantity (EOQ) is to minimize
a. the safety stock
b. the inventory quantities
c. the sum of the demand costs and the back-log costs
d. the sum of the ordering costs and holding (carrying) costs
7. The time a company should place an order is when inventory level has reached zero.
8. The term 'constraints’ in a linear programming model generally refers to:
a. Costs c. Scarce resources
b. Inefficiencies d. Dependent variables